Government may offer cash-back to owners who scrap old cars

The government is poised to offer consumers a large "scrappage" premium to get rid of old cars and buy new, eco-friendly models in a move to revitalise the ailing market. Manufacturers are pressing Lord Mandelson, business secretary, and the Treasury to offer as much as £2,000 under a "scrappage incentive scheme" before March's half-yearly new registrations.

Mandelson indicated last week that he was considering a British version of scrappage schemes adopted or planned by at least eight of the European Union's 27 countries. Germany's, the most generous, offers €2,500 (£2,200) to scrap a car more than nine years old.

He has said he is "looking at the experience of other countries" but is understood to have told car industry executives it may be impossible to meet their March target date. The Treasury is said to be digging in its heels.

Experience shows, according to continental producers, that the scheme is enticing consumers back into showrooms. Many dealers offering huge discounts fear they could go out of business without this lifeline."The last two weeks in Germany, since the scheme was introduced, have seen floods of people descending on showrooms," one senior European sales executive said. "It has brought renewed and urgently required vitality back to the market."

A German poll at the weekend showed the so-called "Abwrackprämie", costed at a maximum €1.5bn, had attracted support from 1 million potential buyers. About 17,500 have asked for the payment.

It is understood that the EU competition commissioner, Neelie Kroes, who has been sharply critical of aspects of France's €6bn stimulus programme for the ­industry, confirmed in detail yesterday, favours the premia as valid aid to boost consumer demand despite wariness about direct state financial help for manufacturers.

France's "prime à la casse" offers between €1,000 and €2,000 and has already boosted demand for new, small, fuel-efficient cars produced by Renault and Peugeot Citroën. Italy adopted a €1,500 premium last week for eco-friendly cars.

It said the market would drop to 1.72m vehicles this year, 685,000 down on 2007, but indicated a steep (41%) leap in demand for mini cars, the smallest on the road.

Paul Everitt, SMMT chief executive, said: "Our fundamental problem is demand. Until we start shifting cars our production lines, many of them idle for months, will not move. This [scrappage] could have a much broader impact than just on vehicle retailers and manufacturers; it could reboot competition in the market and demand in the economy."

He added: "Other EU countries have launched scrappage incentive schemes which have the result of boosting consumer confidence and delivering significant environmental improvements."

It is understood that the London mayor, Boris Johnson, has pressed Mandelson to adopt a scheme to encourage small businesses ("white van man") to buy small commercial vehicles before the capital's lower emissions zone is extended next year.

• This correction was printed in the Guardian's Corrections and clarifications article, Saturday 14 February 2009. This report referred to the extension of London's lower emissions zone next year, but Boris Johnson, the mayor of London, announced earlier this month that he will suspend the planned extension.